George W. Bush became president in 2001. Styling himself as a “compassionate conservative”, he led Republican members of Congress in a new brand of policy — representing total departure from ‘fiscal conservatism’.
Tax cuts were enacted, more extensive than anything seen in recent American history. Spending too was increased — with Bush overseeing an increase in federal expenditure, from $1789 billion to $2983 billion (70% increase).
Given that America was already carrying significant debt, the combination of vast tax cuts & major spending increases represented serious fiscal irresponsibility. How serious exactly?
Tax cuts, when proposed, were costed at an enormous $1.35 trillion ($13,500 billion) — and this was only achievable, by the spurious claim that cuts would be for a limited duration & then expire. As we know, Republicans in Congress have been vehement in forcing extension of these — and refused, to let them expire. Extending them, could add up to $5 trillion to the debt.
However, economic policies — which may have been dangerously deficit-laden, but not immediately unstable — were interrupted by the terrorist attacks of 9/11.
Military response in Afghanistan was rapid. As the situation in Afghanistan stabilized, ‘neo-cons’ in the White House considered the situation — and decided to use it as an opportunity, to attack another of America’s enemies.
As a second war was opened, costs spiralled. Much of it off-budget — paid for directly out of appropriations, rather than approved through the budget process.
Republican officials (neo-cons) made optimistic assumptions, as to cheaper & easier ways to wage war, against the advice of seasoned generals. Relying on tactical bombing, light force strengths & a minimal perceived need to pacify/ police the occupied population, were critical errors.
These was compounded, by withdrawing necessary troops from Afghanistan & allowing the Taleban to return and gain a foothold.
From initial claims by Vice President Dick Cheney — a leading figure in Republican and neo-con circles — that the Iraq war might cost $100 billion, CBO reports in 2007 state that Iraq and Afghanistan could cost a total of $2.4 trillion dollars by 2017. Other economists such as Joseph Stiglitz, estimate the Iraq War on its own will cost more than $3 trillion — on conservative assumptions.
George W. Bush’s term ended in disaster.
By 2007, the US & world housing markets had become severely over-priced — in a classic asset bubble. Inflated by years of low interest rates & deregulated to allow banks to invest in complex derivatives, the market believed that it had mathematically modelled, on-sold and “driven out risk”.
But, as instability spread through the market, mathematical models broke down. Mortgage bonds turned out to depend on loan servicing, & the real value of the housing market — not just on models giving a AAA rating.
Leading an equalization of this market error, traders started selling & short-selling in correction. CDO mortgage bonds collapsed, and the banks & financial institutions holding these came to the brink of failure. Share markets plunged. Growth, profits, hiring & employment collapsed.